Monday, July 28, 2014

Argentina vs. Germany on macroeconomics

Robert Kuttner points out the contrast between austerian Germany and post-neoliberal Argentina in The World Financial Cup Huffington Post 07/13/2014. He describes to how Argentina's handling of its bankruptcy in 2001 highlights the dilemma of the eurozone crisis countries:

Which brings us to Argentina. In effect, Argentina is the Greece of South America. In the western hemisphere, the enforcer of punishment is not Germany but the United States -- specifically the U.S. Supreme Court.

Argentina experienced a debt crisis early in the last decade, and negotiated an agreement with most of its foreign bondholders to accept payment at about 70 cents on the dollar. This sort of discount is standard practice in a bankruptcy.

However, while corporations can use bankruptcy law to renegotiate their debts, there is no bankruptcy law for countries. That's why Germany was able to keep Greece in a kind of debtors' prison.

When Argentina negotiated debt relief with most of its creditors, a few hedge funds (known in the trade as "vulture funds") bought up deeply discounted Argentine debt and then sued in the U.S. courts to collect at 100 cents on the dollar. Not only that, but the funds asked the courts to find any other creditor who took less than full payment in contempt of court.

The case worked its way through the appeals process, and last month the Supreme Court refused to hear an appeal from a lower court case that found for the vulture funds. Specifically two hedge funds, Elliott Management and Aurelius Capital Management, which hold only about 1.35 billion out of Argentina's more than $80 billion in debt, are now able to force a default on the nation's entire debt, possibly by the end of this month.
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